Top of the Hill developers roll out TIF package to CH-UH school board

Deron Kintner, general legal counsel with Top of the Hill developer Flaherty & Collins Properties, makes the case for tax incentives at a Jan. 23 meeting with city and Cleveland Heights-University Heights school officials. Tom Jewell/Special to cleveland.com

CLEVELAND HEIGHTS, Ohio -- Developers for the Top of the Hill project have laid out the groundwork for a financial incentive package requiring approval from the Cleveland Heights-University Heights school board.

City officials introduced a "30-year, 100 percent" Tax Increment Financing (TIF) proposal Tuesday that would enable a "catalytic" $75-$80 million multi-use commercial and residential development to be completed by the third quarter of 2020.

While the City of Cleveland Heights has fully-negotiated Development Agreement waiting in the wings for council approval in the coming weeks, there have not yet been any parallel negotiations with the school district.

"The city and the developer would like to have a financial compensation agreement finalized in the first quarter of this year," school tax attorney David Seed said Tuesday (Jan. 22). "But this is still more of a 'first volley' as to the proposed compensation for the district."

In contrast to tax abatements, the TIF plan was described as a "tax diversion" mechanism, where developer Flaherty & Collins Properties would get a big break on property taxes but would still provide the school district with about 25 percent of the money it would otherwise have received.

This would be accomplished through "Payments In Lieu Of Taxes" or "PILOT's," in which the school district would go from the current $21,000 it receives annually in property taxes for the 4-acre parcel to about $421,000 a year.

A PILOT agreement would then allow Flaherty & Collins to put the remainder of the money that would have gone for taxes into debt service payments, which are estimated at $1.8-to-$2.2 million a year, to fund the project's construction.

"The developer can pay debt service and secure a loan using the TIF proceeds, borrowing off of that as collateral," Seed told the school board.

Deron Kintner, general legal counsel with F&C, along with Ryan Sommers of Project Management Consultants, explained projections of the valuation on the property going from the current $764,000 to $43 million -- the figure used to arrive at the PILOT amounts being sought.

"But if you're putting $77 million into the property, how do you come up with the value of $43 million?" asked CH-UH school board member Malia Lewis.

Developers, City Manager Tanisha Briley and Economic Development Director Tim Boland explained that the TIF and the PILOT's are intended to address this "gap" in funding for the project.

The plan calls for over 200 studio, one- and two-bedroom luxury apartments, 15,000 square feet of commercial retail space, a 525-space parking garage, and "on the point" at the intersection of Cedar Road and Euclid Heights Boulevard, a 120-room nationally-branded "boutique" hotel.

There is also "potential" for townhomes and "Class A" office space, Kintner added.

"This is not the easiest market to do this kind of project, but Cleveland Heights is due for one," Briley said. "And there's still a lot of work to do to get the financial gap filled."

Briley added that this would be an "incredible shot in the arm for our community -- and it would show that we can do it."

School board member Dan Heintz questioned the possibility of saturating the current housing market, given the construction boom in University Circle just down the hill.

"I tend to look at this with a little bit of skepticism and I have concerns about occupancy," Heintz said, referring to an 30 apartment buildings surrounding the Cedar-Fairmount district.

Kintner said that with the noteworthy exception of Chicago, the cost of "urban infill" development is a little higher the Midwest given the rent levels that don't reach those commanded along the east and west coasts.

But at the same time, "there is still not as much (housing) supply here as there should be," Kintner said of the current Cleveland market, throwing in the economic adage that "a rising tide raises all ships."

Heintz also pointed out the CH-UH Board of Education office windows across Miramar Boulevard to the University Square complex, which had its own school district-approved financial package at one time but has been mired in bankruptcy and foreclosure for years -- although new ownership has taken over.

"What I look out that window and see is very real to me, although I'm sure there were some very optimistic people in this room years and years ago," Heintz said.

CH-UH Chief Financial Officer Scott Gainer noted that the school board actually derived the most benefit from the University Square deal, in terms of a $5 million cash payment from the developers in order to forego taxes.

"This is not the kind deal where we'd collect money up front," CH-UH School Board President Jim Posch said about the Top of the Hill proposal.

As for the market and the risk, city officials and developers said they wouldn't take on the project if they didn't think it would fly, after numerous stops and starts on the site in the past, the last one with the economic downturn in 2008.

"This site is special, and it's already a successful area," Boland said of Cedar-Fairmount.

Kintner concurred, adding that in terms of a site, "we think this is a home run, and one that will have a catalytic effect on the whole community."

She was referring to the Severance Town Center across from City Hall, where the city hopes to work with the new owners to restore occupancy and relevance to the former mall, now largely vacant.

"We are intensely optimistic about this project, but we're not just looking at it through rosy-colored glasses," Briley said. "We don't want anybody to think the city hasn't been keenly attentive to any possibility of a 'worst case scenario.'"

For starters, the city is not planning to sell its prime piece of real estate, opting instead for a "ground lease" on the land.

No formal action was taken by the board Tuesday, but Posch issued a followup statement today (Jan. 25), thanking the city and developers for bringing the proposal forward.

"We currently earn around $21,000 annually from the property," Posch said. "The fact that this would increase the revenue to something in excess of $400,000 annually is a big win for our students and for our community."

If the land is not developed, the school district would continue to receive just the $21,000. And if the project does proceed as hoped, the property tax rate would return to normal once the TIF period is up.

"Also, the fact that the city is bringing this to us as a TIF instead of a tax abatement allows the school district to be a revenue-sharing partner in this project," Posch added. "I really appreciate the City's willingness to work with us."